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Lecture notes + summary all articles Economics of safety and security
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EconomicsMicroeconomics: studies how individuals behave and make decisions.
- Consumer theory: Preferences and decisions of individuals
Why take a vaccination? Personal costs vs. personal benefits, vs. costs and benefits to others.
How to combat climate change? What policy can help people make the decision that is ‘best’ for society.
- Producer theory: Behaviour of individual firms
How do firms behave in markets with and without competition?
What are the consequences from (no) market competition?
Macroeconomics: Concerned with general economic factors (no individual behaviour).
- The real economy: concerns the flow of goods and service
The effect of government and firm investment on production.
The effects of disasters on production.
How does displacement of people affect wages and labour
- The monetary economy: Circulation of money
How does government borrowing affect inflation, interest rates, and investment?
What is the effect of ‘helicopter money’ on inflation and interest rates?
Case 1: Pharmaceutical industry and vaccinations
There are only a few companies in the pharmaceutical industry, this means that there is little
competition. What can explain this? What are the consequences?
Producer theory: Competition.
Competition structure predicts Firm behaviour such as setting price, quantity, and innovation.
Implication Consumer and producer surplus (welfare)
- Perfect competition: Many firms
- Monopoly: One firm
- Oligopoly: A few firms
Firms make decisions based on a cost-benefit analysis. In order to decide whether to enter a market:
Compare expected profits from entering the market with best alternative.
Once the firm entered the market:
• How much to sell, at what price? -> marginal benefit = marginal costs
,• Marginal costs: costs of 1 additional unit of the good
• Marginal benefit: benefit from 1 additional unit of the good
Note: MC and MB typically differ per number of products.
Market:
A place where two or more parties are involved in buying and selling of a good. Determination of
price and quantity
- Demand: consumers
- Supply: firms
- Equilibrium: price and quantity
Efficiency Units are sold to those with the highest value for the good.
Optimal outcome: each product for which the costs are lower than or equal to the value that the buyer
attaches to the good is traded, mc_producer=mb_consumer
- Consumer surplus: surplus that the consumers receive from the market.
- Producer surplus: surplus that the producer(s) receive from the market Link with profits.
Not efficient: mc_producer<mb_consumer.
Perfect competition:
• Many firms that are essentially the same.
• These firms sell the same good (in the eye of the consumer)
• Firms have no effective possibility to choose price
• Price equals marginal costs
• Cost structure: often decreasing returns to scale (i.e. when producing more goods each good costs
more than the previous good)
• Individual firms produce little (as compared to the total output in the market).
Characteristics of the market:
,• In the short run firms can
make profit
• Free market entry and exit of
firms
• In the long run firms make no
economic profit (accounting
profit is possible)
If higher price -> no one buys
If lower price -> firm makes a
loss
• Long run no profit is due to
free firm entry and exit
• Market is efficient (the optimal amount is produced and sold)
Each product is sold for which marginal benefit consumer > marginal costs firm.
Monopoly:
• Only 1 firm in the market: this means the product has no close substitute.
• Cost structure: increasing returns to scale
due to high fixed costs.
• Two reasons for a monopoly: natural or legal.
• Free entry may or may not be possible (legal
versus natural monopoly).
Characteristics of the market:
• A firm chooses its price (a lot of market power)
-> mc_producer=mb_producer for the last unit
of the good (mc_producer<mb_producer for all
the other goods).
• However: the marginal benefit for the
monopolist decreases when selling more (when
reducing the price the monopolist also reduces
the benefits from selling all the other goods).
Therefore too little is sold, for a price that is too
high.
, Oligopoly:
• A couple of firms
• Firms sell similar products (but
not the same product)
• Each firm has some market
power
• Entry barriers economies of
scale, access to
expensive/complex technology,
and strategic actions
by incumbent firms designed to
discourage or destroy new
entrants
• Temptation of collusion
Agree on a ‘market’ price or quantity
Competition authority as watchdog
Comparing the markets:
Cost structure
• High fixed costs is typically associated with less firms
• Increasing marginal costs (the faster/stronger the increase, the more firms)
Pricing
• Prices: monopolist>oligopolist>perfect competition
• Quantities: monopolist<oligopolist<perfect competition
Efficiency
• The higher the dead weight loss, the lower the efficiency.
• Efficiency: monopolist<oligopolist<perfect competition
* Efficiency here is: given that the product/market exists (lack of protection may prevent a market from
developing).
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